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FX BANK FORECAST · COVERAGE
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Aggregated year-end forecasts, scenario shifts, and curated analyst notes from 38 institutional desks. No promotion.
FX BANK FORECAST · COVERAGE
Aggregated year-end forecasts, scenario shifts, and curated analyst notes from 38 institutional desks. No promotion.
The desk argues that while the US service sector remains robust, as illustrated by the ISM services index, concerns about weak hiring persist, influencing market expectations for future Federal Reserve rate hikes. The report from ING indicates business activity remains elevated, with the ISM index reflecting a 2.5% GDP growth trajectory. However, employment metrics fell below neutral, highlighting a paradox of rising activity against a backdrop of hiring hesitance, a nuanced dynamic discussed in detail in the original commentary .
The desk frames this as an indication of strong service sector performance amidst underlying labor market weakness. According to the ING report, despite the ISM services index rising marginally to 54.1—consistent with a growth outlook of 2.5% for GDP—employment dipped into contraction at 47.4. This suggests while activity might be vibrant, businesses are cautious about expanding their workforce.
The detail that new orders have remained firm at 57.2 points to sustained demand, yet the contraction in backlog orders adds uncertainty to future hiring intentions. This interplay of growth in service activity against a hesitance to hire could significantly shape the Fed's policy outlook, especially with the upcoming jobs report likely to be influenced by temporary factors like the FIFA World Cup.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
Market implications
Traders should closely monitor the upcoming jobs report for insights into labor market dynamics, particularly any softness which could shift Fed rate hike expectations. A critical level to watch on USD pairs is 1.075, where additional volatility could emerge following employment data.
Risks to this view
A notable risk to this outlook would be a strong rebound in the jobs report that surprises to the upside, effectively diminishing the likelihood of a pause in the Fed's rate hike path. Such a scenario could trigger a dollar rally as market participants reassess their forecasts.
Older quick take Quick take Published 15:40 United States US service sector remains robust, but hiring weakness persists The ISM reports are consistent with 2.5% GDP growth, but they also suggest there is a lack of appetite to hire workers. Friday's jobs report may also be dampened by the conclusion of the FIFA World Cup impacting leisure & hospitality. Another soft outcome would weigh on Fed rate hike expectations Despite the July ISM report suggesting 2.5% growth, the jobs market remains tepid in the low hire, low fire environment Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download James Knightley Chief International Economist, US Business activity lifted by 4 July celebrations & World Cup The July ISM services index was not quite as strong as hoped, but the details remain consistent with annual US GDP growth of around 2.5%.
The headline index rose to 54.1 from 54.0, versus the consensus of 54.5. Business activity was very strong, rising to 59.1 from 55.4, likely lifted by celebrations and events for the 250th anniversary of US independence and the FIFA World Cup. As such, we should expect a cooling in August.
The chart below shows the relationship between YoY% GDP growth and the ISM output series. US GDP growth YoY% versus ISM business activity Source: Macrobond, ING "> Source: Macrobond, ING New orders were also very firm at 57.2 versus 55.1 previously, but the backlog of orders dropped to neutral and employment headed back into contraction territory at 47.4 from 51.2. Inflation pressures remain elevated though with prices paid up at 70.3, a touch above the 6M average of 69.0.
The increase here may well be tied to the timing of the survey, which was conducted as the Middle East deal broke down and oil prices spiked higher, given that within the index there were six categories described as experiencing price falls versus only three in the previous survey. Given this situation, the report suggests ongoing robust activity, but businesses remain very reluctant to hire workers and that hints at some caution on the outlook. While inflation pressures appear elevated, they are concentrated and with some positive news coming from the Middle East on a potential reopening of the Strait of Hormuz, those price pressures may soon start to ease.
Mild downside risks for Friday's jobs report Looking to Friday’s jobs report, Monday’s July ISM Manufacturing employment indicator moved into expansion territory for the first time in three years with a print of 52.8. Another positive is the fact that initial jobless claims data remains remarkably low, suggesting businesses are reluctant to let staff go. However, other jobs news has not been so rosy, with today’s ISM services employment number a big disappointment, especially given the strength in activity.
Additionally, the NFIB small business hiring numbers have been weak in both May and June. They suggested that, on average, over the two months, just 10% net of small businesses were looking to make a hire, which is a six-year low. Today’s ADP employment number of 44,000 was below the 65,000 consensus and the weakest since January.
Then we have the JOLTS data showing job openings falling more than expected, although the Indeed daily data are even weaker. This presents a very mixed picture, but in general we expect the figures to be consistent with the low hire, low fire narrative. Having average monthly payrolls gains of just 8,507 between January 2025 and February 2026, March, April and May were better.
But June’s non-farm payrolls figure of 57,000 was half what was expected and there were 74,000 of downward revisions to the previous couple of months. For July, we are looking for around 70,000 jobs being added, which is respectable, but a touch below the 80,000 consensus prediction. While the FIFA World Cup final was on 19 July, the knockout stages saw the number of participants and games fall steeply, which will likely have had some impact on temporary hires in the leisure and hospitality sectors.
We also expect the unemployment rate to rise to 4.3% from 4.2%, largely because we think there will be a correction after a steep fall in the participation rate in recent months. The lack of hiring suggests these returning people will classify themselves as unemployed. An outcome in line with our predictions is likely to leave the market pricing a September Federal Reserve rate hike very much in the balance.
We will have a further jobs report and two sets of inflation data between now and 16 September and we continue to predict a no-change outcome at that meeting. US Services Jobs ISM Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument.
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